A Simple Strategy for Investing in Stocks
The stock market is a complicated system. Anyone who tells you they have a sure-fire strategy for making money in the stock market is either lying or fooling themselves. The volatility in stock prices means that most people will lose some value every day. Most people who try to invest in the stock market spend too much time agonizing over their decisions.
Here are a few tips that successful investors have shared over the years.
Diversify, But Don’t Diversify Too Much
It makes sense to invest your wealth across multiple investment opportunities. But some people chase Easter eggs. That means they are constantly buying new stocks.
You cannot invest in every good thing. And if you’re not experienced enough to trade in and out of stocks, then you should only invest in mutual funds. Limit your investments to just a few mutual funds and then be patient.
Here is how.
Say the market is in an upward trend right now. Find 2 mutual funds that are experiencing modest growth. You want to invest some money in both of those funds and do so at regular intervals while the market is growing.
When the market finally tops out wait a while until you can find two mutual funds that are growing in spite of the downward trend. Now move your periodic purchases to those two funds.
The Secret is to Leave Invested Money Where It Is
Yes, your mutual fund shares will decline in paper value when the market changes direction. That is why you only want to make new purchases in funds that are earning money off the current market trends.
Over time your previous investments will come back and grow again. Eventually you’ll be invested in about four mutual funds that collectively offer you performance regardless of what the market conditions are like.
The longer you leave your investments alone, the more time they will have to grow. Your mutual fund managers will do what they can to minimize losses and find growth opportunities. And many mutual funds pay dividends even as their share prices decline. If you transfer those dividends to a money market account you can save your money for future investments.
Do Not Use Your Investments to Make Statements
Some people only invest in “green” companies. While this is a noble ambition it limits the amount of potential growth your investments experience. There are other ways you can support the “green”/eco-friendly companies of the world. Your investments should be made on the basis of risk + potential-return-on-investment.
You don’t need a sky high ROI to justify making an investment. You just want a solid track record that explains itself clearly according to market conditions.
If you are going to invest in green industries you’ll have to be ready to ride out the rough times because green industries tend to do better when everyone has money. Of course we all want to live in a safer, less toxic world but being an investor is not a simple moral choice.
Wait Five Years Before Selling Out of a Stock or Mutual Fund
Because of capital gains taxes you will do better to remain invested in a fund or stock for at least five years. You should always pick an investment on the basis of “where will this investment be in five years?”
If you cannot afford to wait five years for an investment to pay off you’re not ready to make an investment. Save your money until you can afford to make that investment because taxes will decrease the amount of profit you make.
Take Some Profit Off the Table Once a Year
Although you want to be careful about leaving investments to mature, once you have hit your five-year mark you can start thinking about selling off some of your shares if their value has increased over your original purchases.
You can look at these investments in two ways: average value of your purchases or first-in-first-out value.
If you have been purchasing shares in a stock or mutual fund for five years, you should have a record of when you made those purchases. Never sell more shares than you have available for a five+ year selloff. So if you bought 50 shares 5 years ago and another 50 shares 4 years ago, today you should only sell 50 shares.
You can look at your profit as being the sale price above the average cost of all the shares you have bought or you can look at it as being the sale price above the oldest purchase cost of the shares still in your inventory.
The average method helps you realize a stable profit over time regardless of market volatility. The FIFO method allows you to calculate an actual per-share profit.
If you average your share costs it matters less when you make your sales (after the five-year window). If you use FIFO you’ll want to restrict your sales to when the market is in your favor.
Set Reasonable Profit and Loss Goals
Some people remain indecisive about when to sell their shares. They are afraid they’ll miss out on some profits by selling too soon. When you buy a share in a stock or mutual fund, set some limits for yourself.
You will sell when the stock or fund rises to a certain point or drops to a certain point. Many investors set their limits to about 20% above or below the purchase price.
Although a stock or mutual fund may lose a great deal of value when the market tumbles, most of these kinds of investments recover their lost value within 1-2 years. You may do better to wait it out and start buying again after the market has bottomed.
Set Reasonable Purchase Price Expectations
Some people remain indecisive about when to buy shares in a stock or fund. If the market has just gone through a significant downturn and you’re not sure about whether it’s a good time to buy, wait three months.
Yes, you’ll miss some of the great bargain-basement opportunities but making an investment that keeps up at night is not a good investment. Market growth usually lasts for several years in-between downturns. It’s okay to miss buying at the bottom.
Most people don’t know when a market has really turned around. Many people buy too soon. It’s better to start buying a little late than to buy a little early, if only because you’ll feel better about the investments you’re making.